Software

Adobe's Controversial Subscription Model Proves Surprisingly Popular

When Adobe (ADBE) decided last year to shift from being a company that sells software to one that rents it out, consumers were nothing short of furious. Avid Photoshoppers described the subscription model as predatory, complained loudly on forums across the Internet, and petitioned the White House to step in. Then, it seems, they signed up for monthly subs.

Adobe now has 1.8 million customers paying for these software subscriptions, and it added 405,000 in the last quarter, the company said on Tuesday in its quarterly earnings report. It is making more money selling monthly subscriptions to its Creative Cloud software—the family of programs that includes Photoshop and Illustrator—than it is by selling the software outright. Photoshop enthusiasts may not appreciate having the leash to Adobe pulled tighter, but they’re not abandoning the company.

These subscriptions aren’t without benefits. One is not having to lay out $2,500 every few years. It would take more than four years of monthly $50 subscription fees to reach the cost of an all-at-once software purchase, and the programs will always be up-to-date. In a recent (and non-scientific) survey by CNET, 20 percent of customers said they weren’t planning on renewing their subscriptions, up from 16 percent last year.

Adobe wants to make breaking up harder to do. The company is using carrots and sticks to pressure customers who resist the shift. Later this year, Adobe will end the bulk discounts it offers to many businesses who need to outfit an entire office with its software, tipping the balance farther toward subscription services. It is also planning to launch new Creative Cloud software in the coming months, and it says it will spend liberally to market the release.

What Adobe gets from this is more predictable cash flow, though over the short term it must deal with the shock of not getting bigger, one-time payments. The company has been making less money every quarter since it made the switch. It’s in good company: SAP (SAP), Autodesk (ADSK), and others have been making similar shifts. Microsoft (MSFT) said recently that it has signed up 3.5 million subscribers for Office software and that these subscriptions now make up 15 percent of total consumer licenses sold.

Microsoft is also lurching toward a milestone of its own: the day when it releases Word and Excel for the iPad. The company has scheduled a press event for next week—the first hosted by its new chief executive—at which it is expected to unveil the long-awaited Office for iPad. A subscription-based version of Office illustrates many of the complexities of Microsoft’s situation. If the software proves popular, it will bring new revenue—but Microsoft will have to hand 30 percent of that money over to Apple (AAPL), a bitter rival. Apple will also benefit from adding the popular programs to its roster, giving customers one fewer reason to consider buying one of the tablets Microsoft makes.